Dodd-Frank and Fighting Fraud : One Year Later
August 2011
IN THIS ISSUE
— Whistleblower Protection and Prosecutorial Limitations: Dodd-Frank’s Mixed Messages
— Can a Work in Progress Work at All? Implementation of Dodd-Frank’s Provisions
GREETINGS!
Welcome to the August edition of our newsletter! In this issue, we’ll look back at the provisions of the “Dodd-Frank” financial regulatory bill and assess their anti-fraud effectiveness after the bill’s first year of enforcement.
WHISTLEBLOWER PROTECTION AND PROSECUTORIAL LIMITATIONS: DODD-FRANK’S MIXED MESSAGES
After one year in effect, the broader anti-fraud provisions of the new financial regulatory bill have garnered the most attention: plaintiffs attorneys have reported a surge in employee complaints against their employers, with some describing the motives as simply trying to cash in by using the new protections to reap a windfall award or settlement. The financial incentives are obvious: between 10 percent and 30 percent of a monetary award in cases where the award exceeds $1 million.
While some suggest that the provisions will serve as a catalyst for companies to enhance their fraud prevention systems, internal whistleblowing protocols and overall internal controls, the effectiveness of new whistleblowing protections as an increased fraud deterrent remains to be seen.
The advent of the bill, and the concurrent development of the Consumer Financial Protection Bureau (CFPB), may have also had some unintended consequences. The scope of what qualifies as a “financial product or service” subject to regulation under the Dodd-Frank bill, for instance, would seem to suggest that public records researchers and fraud examiners should not be subject to the limitations on access to information provided either by that bill, the CFPB or the Fair Credit Reporting Act (FCRA), which has long limited researcher access to certain types of consumer information. Whether the letter of the Dodd-Frank law, which would seem to support broader researcher access to information in support of anti-fraud efforts, will actually result in changes to the amount and types of information available to researchers is likely a matter to be decided by the courts.
CAN A WORK IN PROGRESS WORK AT ALL? IMPLEMENTATION OF DODD-FRANK’S PROVISIONS
A separate but equally important issue regarding the effectiveness of Dodd-Frank is the degree to which its various provisions, however worthy as fraud-fighting tools, have been implemented. On this score, the bill does not appear to fare well to date. A recent report found that at the end of July 2011, the one-year anniversary mark, only 13 of 117 benchmark deadlines for regulatory action were met. This same analysis shows that the Securities and Exchange Commission has missed more than half of the deadlines set for its rulemaking efforts, as has the Commodities and Futures Trading Commission.
The delay in enforcement — attributed to some degree to extended consultations between regulatory agencies and various interest groups as rules are defined — has some wondering whether the Dodd-Frank bill will have a muted effect on curtailing fraud, as many have said the 2002 Sarbanes-Oxley bill has done, adding multiple regulations (and legal compliance costs) without achieving behavioral and systemic changes to the consumer’s benefit. After one year, it may be too soon to tell if this will be Dodd-Frank’s legacy, but the early returns on anti-fraud enforcement efforts are not encouraging. If the bill does prove to be a catalyst for enhanced self-regulation by companies themselves, it may have been worth the effort, but the lax pace with which the regulations are being enacted has not created new deterrents toward fraud, as many of the bill’s proponents had hoped.